Bank One Corporation - Page 245

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                         b.  Expected Loss Factor                                     
               On the basis of historical experience, bank dealers                    
          generally ascertained a loss factor for each credit rating.  The            
          loss factor represented the bank’s estimate of its credit losses            
          for each dollar of credit exposure in that credit rating.  The              
          loss factors were generally derived from the bank’s experience              
          with loans to borrowers with the respective credit ratings.                 
                         c.  Loan Equivalency                                         
                              i.  Overview                                            
               A bank would typically establish a credit limit for each               
          customer, and the loan equivalency measurement of credit exposure           
          was used by banks in applying credit limits.  The loan                      
          equivalency amount focused on the bank dealer’s expected credit             
          exposure from a specific counterparty with which it had entered             
          into one or more swaps.  The loan equivalency amount represented            
          the amount of the counterparty’s credit limit, as established by            
          the bank, that was consumed by each swap.  In other words, the              
          exposure model determined the number of swaps that the bank could           
          enter into with the counterparty and stay within the prescribed             
          credit limit.                                                               
                              ii.  Types of Credit Exposure                           
               The concept of credit exposure was broken into current                 
          credit exposure and potential credit exposure.  There also is a             
          third type of credit exposure known as “expected exposure”.                 






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Last modified: May 25, 2011